Oil, Interest Rates & The Middle East

The US–Israel offensive on Iran has triggered significant volatility across global asset classes, particularly in energy markets and, by extension, interest‑rate expectations. Since the start of the year, a barrel of Brent crude has risen by 40%, with roughly half of that move occurring in the past week alone. Echoing dynamics seen in 2022, the potential impact on European inflation has driven a sharp repricing of ECB rate expectations. Just over a week ago, markets were assigning roughly a 50% probability to an ECB rate cut by year‑end; that has now swung to a 60% probability of a rate hike. Bond markets have also moved meaningfully, with German yields rising across the curve. The 2‑year and 10‑year Bund yields have increased by 25 bps and 20 bps, respectively.

Per the chart below, on the 31st of December, markets were pricing a 20% probability that the next move would be a cut, versus today, it’s a 60% probability the next move is a hike.

source: Bloomberg